Virgin Trains and the Department for Transport have been locked in talks over the immediate future of the west coast mainline after the transport secretary said he would rather leave the railways in private hands.

A decision is expected by the end of the week, with Patrick McLoughlin due to give a statement to parliament when it returns from recess on Monday.

The choice for the running of the lucrative London to Scotland line, after Virgin's current contract expires on 9 December, appears to be either a management contract for the incumbent or allowing the state-owned Directly Operated Railways (DOR) to step in. However, with DOR running the east coast line, there is believed to be anxiety within the government at the idea of having Britain's two major rail arteries being, in effect, state-run, with Labour increasingly open to the idea of renationalisation.

Talks are believed to be focusing on the hard cash involved and the legal ramifications of awarding a contract to Virgin without a tender.

Indications from FirstGroup are that while legal action remains an option, it is unlikely to launch any lawsuit soon. Sir Richard Branson, owner of Virgin, had offered to run the service for free but his company has made it clear that circumstances have changed.

McLoughlin reiterated his commitment to the principle of franchising at the Conservative party conference. "My objective is not to retreat back but to use the marketplace and its ingenuity to deliver a railway that people are happy with and content to use," he said.

But he admitted the timetable for resolving the crisis within the department was slipping, as the report by Sam Laidlaw, non-executive director of the Department for Transport, into the lessons of the west coast franchise fiasco is unlikely to be delivered by the end-of-October deadline. Richard Brown's report on wider implications for the franchising process, on which a series of forthcoming contracts will depend, is due by the new year but will be heavily influenced by Laidlaw's conclusions.

Questions are being asked about the roles of the three transport secretaries presiding over the franchising debacle, with Philip Hammond, Justine Greening's predecessor, holding the reins when the flawed GDP resilience model was built.

The department believes its calculations are at the root of the errors that led to last week's scrapping of the award to FirstGroup at a cost to taxpayers of more than £40m in instant compensation to bidders.

While McLoughlin has not ordered any fresh look at the departmental forecasting that underpinned the case for high speed rail, he warned that people should "never underestimate the courts" as the HS2 project also faces calls for a judicial review, with a hearing in December.

He said he hoped to work with Labour to get cross-party consensus on legislation to be included in the next Queen's Speech and taken through parliament before the 2015 general election. He said he would "love to" complete the project within five years, although he accepted it will probably take longer.